13 November 2017

Gideon Rachman: Brexit Britain is at Europe’s mercy

It seems increasingly likely the UK government will simply be politically and technically incapable of delivering a negotiated Brexit. As a result, the likeliest outcome is that, late in the day — perhaps in January 2019 — the EU will present Britain with a “take it or leave it” deal.

[...] That deal will involve Britain making wholesale concessions on a range of issues, from money to migration and markets. The alternative to acceptance would be for Britain to go over the cliff edge of a “no deal” Brexit in March 2019, with chaotic implications for trade, travel and security. Faced with that imminent prospect, it is likely, but by no means certain, that Britain would take the EU’s deal.

The unpleasant reality for Britain is that both the structure of the negotiations, and the relative strengths of both sides, ensure it is in the EU’s interests to indulge in brinkmanship. There are EU countries, particularly Ireland, that would suffer badly from a “no deal” Brexit. But in general, the EU seems to have decided that it can absorb the direct costs of Britain leaving without a deal.

When, at a recent closed-doors event, a senior British politician argued that, in the event of a “no deal”, the EU will be left with a €10bn hole in its budget, the Europeans in the audience seemed unimpressed. As one of them put it to me afterwards: “There are 27 of us. I think we can manage that.”

The Europeans also know that the more that times passes, the more the pressure will mount on Britain. It is widely anticipated that if there is no clear Brexit breakthrough at next month’s EU summit, big banks and businesses will start to make announcements about shifting jobs out of Britain. If that happens, the May government’s negotiating position will get steadily weaker.

The EU side can also credibly argue that the political disarray in Britain is such that making a deal with the May government could turn out to be pointless. On the surface, the British government has a clear position on most of the key issues. The May government has offered to pay the EU €20bn as part of the divorce settlement. It has also said that Britain plans eventually to leave both the EU’s internal market and the customs union, but that there should be a transition arrangement of about two years, during which a new free trade deal is put into place.

But these positions could still change radically in response to events. If, as seems likely, Mrs May is forced to increase considerably the UK’s financial offer to the EU, it is possible that she will face a revolt from within her own party — and could lose her House of Commons majority, and possibly her job. On the other hand, if she hangs tough on the money and allows negotiations to break down, then she may face a similarly dangerous revolt from appalled Remainers.

Beyond the money, there is still an unresolved dispute over whether Britain will indeed leave the EU’s internal market. For while that is currently the official UK position, it is also clear that there are senior figures within the government — including Philip Hammond, the chancellor — who would dearly like to shift policy.

This unresolved conflict between Remainers and Leavers means that Britain’s negotiating position cannot be assumed to be final. Even if Mrs May stays and manages to negotiate a deal, she might be unable to get it through parliament. But if Mrs May falls, then her carefully-crafted compromises will fall with her.

What happened next would depend on whether she was replaced by a Remainer or a Leaver. Alternatively, there could be a general election, with the Tories replaced by Labour. But the real attitude of Jeremy Corbyn, the Labour leader, to Brexit remains mysterious. And Mr Corbyn’s positions would anyway be shaped by the economic and political circumstances he inherited, and by whether he had to govern in coalition with the Scottish Nationalists and the Liberal Democrats.

Observing all these uncertainties, the EU might well conclude that there is no point in making significant moves now. Some Europeans may even nurture hopes that the eventual outcome of all this chaos is that Britain reconsiders its decision to leave the EU altogether. One outside possibility is that the EU’s last minute offer would be aimed not at crafting a Brexit deal, but at persuading Britain to reconsider the whole notion of Brexit.

But such brinkmanship also inevitably carries risks for the EU. The economic consequences of pushing the British over the cliff edge, by accident or design, may be containable for the EU. Imposing a humiliating settlement on Britain might even seem economically advantageous. But the long term political and strategic consequences of a bitter Brexit are much harder to calculate.

Full article on Financial Times (subscription required)

© Financial Times